I have been challenged in the past few months as the competition in the market heats up and the number of wholesalers who are working the area are making offers to sellers which are outrageously high. I want to talk about the way to figure out if the subject property is a Prospect or a deal. This way you will get the keys to remembering if the opportunity is a deal or dud.
I have recently taken some training because my business and I must change, in order to stay ahead of the changes in the economy, the market, and life in general. I took specific training that was on options. This gave me a new tool in my tool box in order to buy more property. I'm excited. I am using these techniques. They are working. When I understand that all scenarios that work for me the chances for success go up dramatically. I must know my plan of: what to buy, where to buy, when to buy, & what price to buy. Just because it is a deal for me doesn’t mean it is a deal for you. NEVER compare yourself to another investor or person!
The Best example was the big buys from the Hedge Funds in 2010-2014 at the court house steps. There was no way I could complete with the volume of properties the Hedge Funds could buy/ consume in one day. If I compared myself to a company who had massive amounts of money behind them I would not be realistic. I cannot compare myself to a company nor could I compete on the prices the hedge funds were willing to pay for the property. The Hedge Funds were satisfied with the lower return on investment (ROI) of 8%. I live off my investments. There is no comparison. The investments I make provide food and fun money. I need to have 15%. They could beat me at an auction every day.
The way I could beat them is finding good deals then sell them to the hedge funds. The article was written for “The Profit” in 3-2013 called “Goliath” This is the reason it is so important to not compare yourself with the other investors out there. You never know what is going on behind closed doors.
This is the scenario: Seller wants $39,977 for a house in a lower income area with drug dealers on the corner. The house is functional, it is a 3 bedroom 2 bath, 1188 sq.ft house. The house needs an outside condenser unit (HVAC), cleaning, & trash out. Repairs are $5,000. Rental rate $800/ month. The house has been remodeled to a very nice level with new baths, new HVAC inside, hot water heater, kitchen, and windows, the place is energy efficient so the tenant will stay there for a long time. The houses in the area are selling for $45,000 to investors in poor condition. Some house are selling in the high $20’s. The house in the $20’s is totally trashed and in need of everything. (Electrical, HVAC, ROOF, plumbing, Stable tenants).
The first thing we need to think about is how am I going to make a profit? Wholesale/ buy fix and sell/ Rental. Then I can put the shoes on of the people who will bring the money if I am wholesaling or buy fix and sell. I need to know the repair budget for a Rental. Are we bringing the money? NOOOOOO! Are we doing the repairs? NOOOOOO! We will put it under contract and then wholesale it to another investor. So what price is the wholesale price? What is the rental price? What is the buy, fix and sell price?
If you want to sell me your properties, this is the Russ Hiner Investment strategy: no war zones! Functional houses! Nicer houses! Cash flow! Rentals! Buy Fix And Sell!
There are two ways to figure out if this is a deal. First is the comps and the second is by using the rental rate as a ROI. In the lower income and war zone areas the Rental rate model will beat any “comps business model” every time and still make good money for the owner. The rental model of course is long term and high ROI. This is the Wholesale price calculated on comps. This is also the buy, fix and sell price. Remember the story of “you fix it they will come”. (If you don’t know that story then ask me when we meet.) You will use the standard calculation everyone else is using for lower income of 60% (standard factor) of value minus your repairs and minus profit of your wholesale fee. This leaves you with a Maximum Allowable Offer to take out the investor of $14,000. If this is how you calculate this deal it is a DUD!
Now look how the true professionals, banker and market dominators look at profit as a business model. Using the Wholesale price calculated on ROI: You will figure the total “all in price.” The “all in price” is all the money it took to put the property into the investor’s portfolio. This amount is called the “All-In price”. To figure the actual profit you will achieve you will need to subtract from the gross income all of the expenses. (Taxes, insurance, management, repairs, reserves and vacancy) this leaves you with the true profit/ net rent not a “cap rate”. So in this example the net rent divided by the “all in price” will equal a Return On investment of 14.6%. This is a Deal!
The answer is the person who owns this property at $39,977 will get a very good deal. The offer if we are buying this house as if we are wholesaling this is $33,000. We will wind up with the ability to make a profit. The person who offers $14,000 will get no deal. You might want to invest in learning how to offer twice as much money and still make a very good living off your investments.
We agree that the offer to the seller is $33,000 when we want to wholesale. If we want to own it we can Pay the $39,977 and collect rent. This allows us to sell to the take out investor at $39,977. Making $6,977.
Another profitable way to think about this opportunity is to place an option on it. If we wholesale this property to another investor at the $39,977. We take an option on the property for $2,000 to be able to buy the property back 7 years later. Sale price $39,977 less $2,000 for the option. (We still make the $37,977 price we need) The house will have gone up in value. Well beyond the $39,977 the investor bought it at. We purchase the property 7 years late r for $$39,977.
Now we made $6,977 cash and got the right to buy the house in the future for the same price as it is today. The option took No Money out of our pocket. How much more money did we create in the future?
Getting an education and spending the time to become aware of the alternative to cash will help anyone’s career in real estate. I look forward to talking to you about your dreams and real estate.
PS. It is a deal at $39,977 and even a greater deal at $14K most offers by wholesalers are around $31-33K. The $14,000 will not get accepted.